Capital Gains

11/02/2015

With the holiday season on the horizon, the end of year financial season has arrived. It's time to deal with money issues relating to income tax planning, charitable giving and scams and the annual check up on family finances. There is not too much in the way of tax drama in the final weeks of the year, with no major legislation being passed, but a few popular tax provisions are still undecided. Congress needs to act soon to extend these favorites, which include a higher education tuition and fees deduction, a mortgage debt forgiveness exclusion and a classroom expense deduction for teachers

Several popular tax provisions are awaiting Congressional extension if they are to survive past the end of the year. Among them is one that will likely impact a consumer's decision to make any big ticket purchases before the year's end, according to TheArizona Republic. This is an option to take a deduction of state and local sales taxes in place of state and local income taxes.

The article, "Time for seasonal planning for taxes, charities, more," notes that one of the extenders in limbo is the option for people age 70½ and older to donate an IRA distribution to charity, rather than include it first as taxable income. This could be an issue for those seniors trying to decide how much of their required minimum distributions to take before the end of the year. A large 50% tax penalty applies on the amount of required minimum distributions that isn't taken.

The capital-gains rules are pretty much the same this year, but some will see some big losses for the first time in a while due to the late-summer swoon in the stock market. Investors are always prudent to look at paper gains and losses in taxable accounts, with an eye on realizing losses before end of the year. If your losses exceed gains, up to $3,000 of the excess can be used to offset ordinary income. Additional losses can be carried forward to future years.

Otherwise, taxpayers generally would be better off deferring taxable income to next year, if they can, while accelerating deductions so they can be taken in 2015. However, that strategy doesn't necessarily play out if you think you'll have much larger deductible expenses next year. In that case, it might be wise to group deductions into either this year or next, if you believe you're not going to qualify to itemize both years. For instance, charitable donations are one type of deductible expense with timing that's easy to control.

Make certain that your gifts count by conducting some research on the groups. Look for non-profits with missions with which you agree and search for their impact, such as the number of meals served, low-income homes built, or animals rescued. Non-profits that are run efficiently are better choices, where most of the money raised is earmarked for programs and not overhead, like executive salaries.

Make sure that the charity is for real. Many seniors are susceptible to giving away their money for reasons such as fear, loneliness, or cognitive problems. Fraudsters prey on these folks.

Be aware of several telltale signs that there might be a problem. Some are obvious, like large, unexplained loans taken out by a senior, or if you see that certain personal belongings are missing. Also, watch for large credit-card charges, gifts to a caretaker, routine bills not being paid, and changes to the person's will or other estate-planning documents.

A sudden increase in spending and atypical, big withdrawals are red flags. Another tip-off is a senior looking to buy risky assets that are out of character with his or her stated investment objectives.

It can be a good idea for elderly folks to sign emergency contact forms—before its needed—that authorizes a trusted adviser to speak with adult children or other relatives in case of emergencies or if they feel there's a problem. Otherwise, account-privacy laws can stifle this type of communication.

10/01/2013

A lot of small business owners accelerated sales of their companies into 2012 in anticipation of the new higher tax rates for 2013, but for those who are thinking of selling now, don’t despair. “There are things you can do to minimize—or with the right set of facts—eliminate taxes.”

Is any of your personal wealth tied up in your business? Well, for some people, the business is their current life, both in time and wealth. Consequently, it can be an especially rude shock to see so much of that wealth snatched away in taxes paid upon the sale of that business.

The tax bite is a bit bigger these days, too.

So, whatever you can do to shelter the business sale from taxation can mean a world of difference for your retirement and even for the whole family. Turns out there are more than a few important tools at your disposal.

First, why is the tax bite bigger these days? The American Taxpayer Relief Act of 2012 (ATRA) befriended a new surtax added through Obamacare and this friendship brought the capital gains tax up from last year’s 15% to 20%, or even a whopping 23.8% for some earners. But wait, there’s more.

An extra provision of ATRA is set to add yet another 1.2% as of the new year. Then add state taxes. It just adds up, and that is really bad math for you.

While you will want to read the original article, here are the three ways:

The ESOP Plan,

The Qualified Small Business Stock Plan, and

The C-to-S Corporation Conversion Plan.

Essentially, the plan (as far as capital gains taxes) is to either find a way to defer the taxation until you leave assets to your heirs (to secure the capital gains eliminating stepped-up basis), to fall under a discounted category, or to actually change the form of the business so as to skate right below that low ceiling.

There are a few more ways of doing any one or all of these steps cleanly and efficiently, especially with those with the foresight to plan well in advance.

For more information regarding Estate Planning for residents in Lee’s Summit, MO please see my web site at http://www.stilleylaw.com/.

09/25/2013

Last year’s historically low capital gains tax rate of 15% is, well, history, but there are still ways around the new higher rates that went into effect Jan. 1. The 15% top capital gains tax rate went up to 20%. High income earners have to tack on another 3.8% (the net investment income surtax). Look at this before year-end if you want to avoid a surprise capital gains tax bill when you file your tax return next April.

Did you know there's a new tax bite effective January 1, 2013? For example, unless you have been paying close attention to capital gains and your expected tax hit for 2013, then you might not realize the pain until tax season. For those in the know, however, there is still time to beat the capital gains tax in 2013 and beyond.

The Great Capital Gains Tax Hike of 2013 was essentially the double-pronged effect of the eclipse of certain tax cuts mixed with a brand new surtax. More specifically, the gains tax was allowed to bounce from 15% to 20%, and Obamacare added to the pain with a new 3.8% surtax to high earners. If you are doing the math, then that equates to a new rate of 23.8% for many (a near 60% increase from the year then ended).

So how do you beat it?

Here are 11 strategies to consider, according to Forbes:

Invest in your primary residence.

Manage your tax bracket.

Harvest losses.

Gifts to family members.

Gifts to charity.

Feed retirement accounts.

Open a 529 college savings account.

Buy and hold.

Move to a tax-friendlier state.

10. 1030 exchanges.

11. Charitable trusts.

Each of these strategies has merit.

Nevertheless, the key is to evaluate them (and others) with your professional advisors in the context of your medium and short-term financial and estate planning goals.

The tax “tail” should never automatically control the planning “dog.”

For more information regarding Estate Planning for residents in Independence, MO please visit my web site at http://www.stilleylaw.com/.

08/23/2013

When you inherit property, such as a house or stocks, the property is usually worth more than it was when the original owner purchased it. If you were to sell the property, there could be huge capital gains taxes. Fortunately, when you inherit property, the property’s tax basis is "stepped up," which means the basis would be the current value of the property.

The transfer of any asset from an estate to an heir can trigger tricky tax issues. Sometimes things can get even more difficult when it comes to a tricky tax like the capital gains tax, so it is worth knowing the ground rules ahead of time.

In the normal course of things post-mortem, the estate pays any state and federal estate taxes, then the heirs might even pay a state inheritance tax. Thereafter, if the heirs sell any inherited asset, then they may not pay any capital gains taxes if the asset is sold at or below its date of death value. This is the magic of what is called the “stepped-up basis.”

Capital gains are always measured by the “basis”, or the original value to the person being taxed (that is how you measure appreciation, after all). This becomes tricky, however, if the asset in question is “gifted” to an heir while the owner is alive. When this occurs, then the heir is stuck with the original “basis” of the one who gifted the asset.

For example, a home purchased in 1972 and “gifted” in 2013 most certainly will have substantial appreciation given real estate values over 40 years. If the home is later sold by the donee, then substantial capital gains taxes will be owed.

On the other hand, the same home inherited in 2013 by the same heir can be sold with some 40 years of appreciation stepped-up to current fair market value and sold with minimal, if any, capital gains taxes owed.

The capital gains tax is anything but simple. Accordingly, consider this a brief introduction to a complex subject. The simple point to take away is that the timing of wealth transfer has serious tax consequences.

Fortunately, capital gains taxes can be minimized, if not prevented.

For more information regarding Estate Planning for residents in Lee’s Summit, MO, please see my web site at http://www.stilleylaw.com/.